Grocers get what they want: cost cuts

CHICAGO (CBS.MW) -- The stores appear to be the biggest victors as the longest grocery-store strike in U.S. history, which idled more than 59,000 supermarket clerks in Southern California, comes to an end.

After holding out for nearly five months and sacrificing what analysts figure is nearly $1.5 billion in lost sales and costs, Kroger, Safeway and Albertsons secured 86 percent of the vote to implement a two-tier program that separates the wage scales of new hires from that of veterans. The companies also won key measures that shift some of the burden of rising health-care costs to employees.

"These were complex and difficult negotiations, which required creativity and tough choices on both sides," Ralphs President John Burgon said in a statement. Ralphs is a division of Kroger.

"We are pleased to have a new contract in place that balances our associates' need for competitive wages, health-care benefits and pension with our company's need to address the significant economic and competitive threats facing our business."

Shares of the three chains rose appreciably in heavy trading Monday. Kroger
KR, +1.25%
the nation's No. 1 chain, advanced 1.3 percent, or 25 cents, to $19.47, while Safeway
SWY, -1.32%
took in 34 cents, or 1.5 percent, to $23.21. Albertsons
ABS, -4.34%
was higher by 19 cents at $24.94.

Workers are expected to be back on the job by Friday, but full schedules could take weeks to get together. The strike and lockout began Oct. 11 and affected almost 900 stores. Using phrases such as "the competitive challenges facing the companies," Kroger, Albertsons and Safeway wanted to slash operating costs as a competitive stance against Wal-Mart, the world's largest retailer.

Wal-Mart, which has been eating away at the grocery chains' sales and earnings in recent years, does not employ union workers and has a cost structure that is considerably lower than that of most supermarket chains.

Neither the unions nor the companies were releasing information about the details of the contract and did not return phone calls.

According to an executive summary and information obtained by the Los Angeles Times and the New York Times, the three-year contract leaves health-care benefits in place for two years and then will have workers co-pay $5 to $10 a year if the reserves are depleted. However, new supermarket hires will have to pay about $9 a week for health care.

Pension contributions were reduced to about 35 percent for new employees, down from the 65 percent paid out for veteran workers.

The pact also reportedly sets wages for new employees as much as $4 an hour lower than those already on the payroll.

New-hire wages are set to begin at $8.90 an hour, compared with the $9.80 floor in the old contract. Hourly wages will not go beyond $15.10 an hour, down from $17.90 an hour in the old contract. It also will take longer to reach those peak rates -- four years longer -- with the contract stretching the time period from two years to six.

Meanwhile, attrition -- which is likely to get a substantial push by the companies in the form of early-retirement packages and other departure incentives -- is estimated to involved one-third of the 70,000 workers covered under the contract in three years and full turnover in a decade.

At those rates, J.P. Morgan analyst Stephen Chick calculates savings of $40 million to $50 million through 2006, or 6 cents a share, he said.

"With two-tier contracts and attrition, the potential for savings appears real," he wrote in a note to clients. Chick raised his opinion on Safeway to "overweight" and added the stock to the J.P. Morgan focus list.

Merrill Lynch's Mark Husson said he thinks the turnover could be greater: "An immediate boost to productivity may come in the next few weeks as employees return to work -- there may be a significant percentage who already left and whose ready-trained replacements will immediately come in the on the new package.

"The fact that their costs are still higher than Wal-Mart's is not a concern. Their business model rests on having employees capable of providing high levels of service, and you do not get those by paying minimal wages and benefits."

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